Chapter 7 - Business Interruption Insurance

Question 1

Purpose of Business Interruption Insurance

Answer 1

To address indirect losses by paying those expenses that continue during the period of the interruption or replacing the profit that would have been earned

Question 2

Why Insureds resist buying BI

Answer 2

1. Too technical
2. Some insured simply don’t want to share financial information
3. Insureds don’t understand how important it is

Question 3

Sources of BI Claims

Answer 3

1. Damage to property (fire, water damage, earthquake)
2. Failure or breakdown of public utilities (power and watrer)
3. transportation accidents
4. damage to neighbouring premises (anchor at a mall)
5. damage to property of major supplier or purchaser
6. actions of regulatory authorities
7. miscelleanous causes (strike)

Question 4

Potential sources of Income during interruption

Answer 4

Capital reserves (taking money out of the business)
Bank loans (may put stress on the business once re-established)
Increasing Prices (may no longer be competitive)
Purchase BI Insurance (this is the most economical way to fund BI loses)

Question 5

Gross Earnings Form

Answer 5

Indeminity period - starts paying first day and stops when property is repaired. Disadvantage, customers may not return when business is repaired. Costs less than profits form

Question 6

Profits Form

Answer 6

Starts on day of loss and continues until the income earned has been restored to what it would have been had the loss not occured. Indeminity usually 12 months but can be increased to 18 to 36 months

Question 7

Five characteristics of all BI Forms

Answer 7

Insures same perils as the property policy, designed to indemnify insureds, indemnity can extend for 1 or 2 years past expiry, pays for expenses incurred so long as they reduce the amount he insurer would have to pay, pays for loss of income if insured is unable to access business due to civil authority

Question 8

Fixed Expenses vs Semi-Variable Expenses

Answer 8

Fixed - Those expenses that will continue including taxes, management salary, insurance premiums

Semi Variable - those that may or may not continue (power, water, heating and salary)

Question 9

Gross Profit

Answer 9

Gross profit is determined by subtracting Cost of Merchandise from Total Net Sales. Discounts, freight, returns, commissions are permitted deductions but not salaries.

Question 10

Net Profit

Answer 10

Gross Profit - Operating Costs.

Question 11

Gross Earnings Form

Answer 11

For determining amount of insurance for gross earningss form, insureds should use net profit (not gross) and develop a list of continuing expenses. Gross Profit in accounting terms also permits for more deductions than gross earnings form and will result in less insurance being purchased than needed.

For determining whether to buy Gross earnings vs profits form, insured should consider the:
1. nature of the business. (would an interruption be long or short)
2. the type of perils most likely to cause an interruption (the time it takes to win back customers to competition)

Determining the amount:

1, Complete appropriate worksheet.
a. Gross Profit must insure all operating costs and salaries
b. Profits Form must insure that amount and only those operating expenses will continue
2. Allow for future trends, it is important estimated growth of business be factored into the amount of insurance purchased

Question 12

6 Miscellaneous Forms

Answer 12

Gross earnings (Manufacturing)
Monthly earnings Endorsement
Contingent Business Interruption
Extra Expense
Rental Value Form
Auditors & Professional Fees

Question 13

Gross Earnings Form Key Coverages

Answer 13

1. Amount Payable (Measure of Recovery) the insurer agrees to pay the amount by which gross earnings of the business have been reduced
2. Must insure for gross earnings, mainly include all salaries to management and employees and all operating expenses. The only deduction allowable is cost of merchandise.
3. Coverage provided on Actual Loss sustained basis (the adjuster will determine how much income the business would have earned had the interruption not occured & what expenses woudl be seen as necessarily continuing
4. All parties involved in repairing or replacing the lost or damaged property must act with due diligence and dispatch (delay of landlord selecting contractor, slowness of supplier providing materials, strike or labour disturbance) this clause is said to be impersonal (applies to persons other than insureds as well)
5. Co-insurance clause: Either 50% or 80% gross earnings
6. Insureds do not have to insure total payroll, insureds cannot deduct salaries from gross earnings. Ordinary payroll expense - salaries of services that would be dispensed in event of prolonged interruption. Specialized employees, owners and mangers will generally need to be paid during interruption. Payroll option 2: isnuring ordingary payroll (only available for 80% co-insurance clause) insures for 90 or 180 days only, beneficial for short closures. When insured does not insure ordinary payroll, there is endorsement that provides for statutory payment in lieu of notice (2 weeks pay)
7. Premium Adjustment - insured must apply for refund within 12 months of expiry of policy, no refund when loss has been paid, for 50% co-insurance - 25% refund (max), for 80% co-insurance 50% refund (max)
8. Resumption of operations - obligation to attempt to resume operations as soon as possible
9. Expenses to reduce loss - insurer agrees to pay for extra expenses when insured is able to prove insurer saved more in paying to get business back faster
10. Media limitaiton - loss media data coverage limited to 30 days,
11. Interruption by civil authroity- 3 conditions - The damage must have occured at a neighbouring premises, the peril causing the loss to neighborign premises must be a peril covered in insured’s policy, customers were ordered off by civil authority (note coverage is limited to 2 weeks only)
12. No coverage for building law or bylaw (can be added as endorsement), strike (no endorsement available), damages, fines, penalites (endorsement avaliable), loss of lease, license, contract, (no endorsement avaliable)

Question 14

Profits Form key Concepts

Answer 14

1. Amount Payable - insurers pays net profit plus all continuing expenses.
2. Eligible businesses - mercantile and manutfcatuing risks
3. indemnity until the gross profit is at level had loss not occured, subject to indemnity period selected.
4. Bylaws Coverage included - payment provided for additonal time required to comply with buildnig bylaw after loss
5. Due deligence and dispatched. Personalized, requires insured to react as quickly as possible to respond to a loss but no penalty for delays caused by others
6. No coinsurance clause. insures 100% of net profit plus all standing charges

Question 15

Business Interruption Gross Earnings Endorsement Form (Manufacturing)

Answer 15

Main difference between this form and non-manufacturing form is that hte amount of payment is based on produciton plus profit would hvae been realzied a tiem of production

Question 16

Monthly Earnings Endorsement Form

Answer 16

This form allows small business to insure without having to share financial information nor rigid co insurance requirements. Disadvantage, higher rate, insured has to purchase 4 times the amount of insurance needed for any 1 month, 25% only liable for 25% of that loss

Question 17

Contingent Business Interruption Coverage

Answer 17

Covers loss of income to insured when loss occurs at premises of major customer or major supplier. ALso insures magnet or anchor property sustains losses

Question 18

Extra expense endorsemetn

Answer 18

endorsement used to provide money for extra expense the insured may incur getting back into business as soon as possible.. Claims are paid by number of months to reestablis hbusiness referred to as period of resotration (40/70/90/100 Form). 40% limit of insurance when the period of restoration is not greater than 1 month. 70% when period less than 2 months. Key advantage is insured do not need to provide evidece that expenses resulted in a reduction in amount of the claim

Question 19

Rent or Rental Value endorsement

Answer 19

insures loss of rental income, acutal annual rents plus estimated rental value of unoccupied portion and fiar rental value of portion occupied by insured.

Question 20

Audiotr fees

Answer 20

to pays fees of accountant hired by insured to develope financial information

Question 21

Professional Fees

Answer 21

To pay fees of all professionals hired by insured to develop all information needed by insurer

Question 22

Recipient property

Answer 22

One which the insured is dependent upon to purchase its products or good

Question 23

Contributing property

Answer 23

ONe Which the insured is dependingt upon for materials or goods

Question 24

Actual Loss sustained

Answer 24

Referes to the basis of payment under most business Interruption policies. The amount of payment is limited to the actual amoutn business would have earned had loss not occured.